Scope and Applicability
Rule 15c3-3, promulgated by the Securities and Exchange Commission (SEC), governs the custody and use of customer-owned securities and funds held by broker-dealers (17 CFR § 240.15c3-3). Its scope encompasses all registered broker-dealers, including those operating as security-based swap dealers or major security-based swap participants (SmartAsset).
Key Facts
- Scope: Rule 15c3-3 applies to all registered broker-dealers, including those registered as security-based swap dealers or major security-based swap participants.
- Customer Definition: The rule defines a “customer” as any person from whom a broker-dealer has received or holds funds or securities for the account of that person. It does not include other broker-dealers, municipal securities dealers, or government securities brokers or dealers.
- Physical Possession: The rule requires brokerages to have physical possession of customers’ securities. This means that paper stock certificates or other securities must be kept in a safe place.
- Reserve Requirements: Rule 15c3-3 sets forth specific reserve requirements for broker-dealers to ensure the protection of customer funds and securities. These reserves act as a safeguard against potential financial difficulties faced by the broker-dealer.
- Segregation of Customer Assets: The rule mandates the segregation of customer assets from the broker-dealer’s own assets. This separation helps protect customer funds and securities in the event of the broker-dealer’s insolvency.
- Exclusions: Certain accounts and entities are excluded from the definition of “customer” under Rule 15c3-3. These include general partners, directors, principal officers, and certain types of accounts held by broker-dealers.
Definition of “Customer”
The rule defines a “customer” as any individual or entity from whom a broker-dealer has received or holds funds or securities for their account (17 CFR § 240.15c3-3). Notably, this definition excludes other broker-dealers, municipal securities dealers, and government securities brokers or dealers (SmartAsset).
Physical Possession of Securities
Rule 15c3-3 mandates that brokerages maintain physical possession of customers’ securities (17 CFR § 240.15c3-3). This requirement extends to paper stock certificates and other physical representations of securities, which must be securely stored in a safe location (SmartAsset).
Reserve Requirements
To ensure the protection of customer funds and securities, Rule 15c3-3 establishes specific reserve requirements for broker-dealers (17 CFR § 240.15c3-3). These reserves serve as a buffer against potential financial difficulties faced by the broker-dealer (SmartAsset).
Segregation of Customer Assets
The rule requires the segregation of customer assets from the broker-dealer’s own assets (17 CFR § 240.15c3-3). This separation safeguards customer funds and securities in the event of the broker-dealer’s insolvency (SmartAsset).
Exclusions from “Customer” Definition
Certain accounts and entities are excluded from the definition of “customer” under Rule 15c3-3 (17 CFR § 240.15c3-3). These exclusions include:
- General partners
- Directors
- Principal officers
- Certain types of accounts held by broker-dealers (SmartAsset)
Conclusion
Rule 15c3-3 plays a crucial role in protecting customer assets and ensuring the integrity of the securities industry. By establishing clear guidelines for the custody, use, and segregation of customer funds and securities, the rule helps maintain investor confidence and minimize financial risks.
Sources
- SEC Rule 15c3-3
- FINRA Rule 15c3-3 Interpretations
- SmartAsset: What’s the Big Deal About Rule 15c3-3?
FAQs
What is the purpose of Rule 15c3-3?
Rule 15c3-3 aims to protect customer assets and ensure the integrity of the securities industry by establishing clear guidelines for the custody, use, and segregation of customer funds and securities.
Who does Rule 15c3-3 apply to?
Rule 15c3-3 applies to all registered broker-dealers, including those operating as security-based swap dealers or major security-based swap participants.
What is the definition of “customer” under Rule 15c3-3?
A “customer” is defined as any individual or entity from whom a broker-dealer has received or holds funds or securities for their account, excluding other broker-dealers, municipal securities dealers, and government securities brokers or dealers.
What are the physical possession requirements for customer securities under Rule 15c3-3?
Brokerages must maintain physical possession of customers’ securities, which includes paper stock certificates and other physical representations of securities, and store them securely in a safe location.
What are the reserve requirements under Rule 15c3-3?
Rule 15c3-3 establishes specific reserve requirements for broker-dealers to ensure the protection of customer funds and securities, acting as a buffer against potential financial difficulties.
What is the requirement for segregation of customer assets under Rule 15c3-3?
The rule requires the segregation of customer assets from the broker-dealer’s own assets to safeguard customer funds and securities in the event of the broker-dealer’s insolvency.
Are there any exclusions from the definition of “customer” under Rule 15c3-3?
Yes, certain accounts and entities are excluded from the definition of “customer,” including general partners, directors, principal officers, and certain types of accounts held by broker-dealers.
What are the consequences of violating Rule 15c3-3?
Violations of Rule 15c3-3 can result in enforcement actions by the SEC, including fines, suspensions, or revocation of registration.